Plantation sector
Maintain neutral: According to recent media reports, the Indonesian palm oil levies were expected to be imposed on July 16. Based on our channel checks, the authorities there have indeed started collecting the crude palm oil (CPO) levy of US$50 (RM190.50) per tonne and the processed palm oil levy of US$30 per tonne.

The Jakarta Post added that the Indonesia Oil Palm Estate Fund (BPDP) aims to “generate between 3.5 trillion rupiah (RM994.56 million) and 4.5 trillion rupiah up to the end of this year from palm oil shipments”. 

Furthermore, the agency first “plans to replant at least 2,000ha of oil palm plantations run by smallholders” for around 60 million rupiah per ha or approximately US$4,500 per ha.

Its next priority is to subsidise biodiesel by another 600 rupiah to 700 rupiah per litre to help domestic consumption reach 1.8 million to two million kilolitres (kl) in the next four months, with a targeted total consumption of 5.2 million kl for 2015.

We are “neutral” on the CPO price impact as the levy has long been anticipated by the market since it was introduced in May. As highlighted in our sector update, we expect the Indonesian levy to boost Malaysian exports in the latter half of July 2015. Thus we revise our July 2015 export forecast up to 1.71 million tonnes from 1.68 million tonnes.

Accordingly, we also lower our July 2015 closing inventory forecast to 2.13 million tonnes from 2.18 million tonnes. Note that our new forecast indicates lower July 2015 inventories against June 2015.

We think the key beneficiary of this measure is the Indonesian downstream industry, where PPB Group Bhd’s associate Wilmar operated 25 refineries and nine biodiesel plants as of 2014. Note that other companies under our coverage with refinery operations in Indonesia include Sime Darby Bhd and Kuala Lumpur Kepong Bhd.

Based on the latest CPO price at US$575, the CPO levy of US$50 per tonne implies a taxation of 8.7%, compared with 0% imposed before the levy was implemented. 

Higher export tax rates generally translate into better margins for refiners due to better bargaining power against upstream producers. Hence, we think the news could lead to recurring interest in PPB, whose share price has been stagnating over the last few months, while the levy implementation was delayed.

We estimate the levy could collect an amount of US$250 million to US$300 million in 2015, within the lower end of the BPDP’s forecast range.

Assuming 40% of the fund is used for subsidies at 600 rupiah to 700 rupiah per litre, we calculate that 2.2 to 2.6 million kl of biodiesel could be subsidised by the BPDP. 

We think this is likely to be applied on top of the existing 1.7 million kl of subsidised biodiesel as budgeted by the Indonesian government earlier this year.

Note that unsubsidised biodiesel production is not economically viable currently because the CPO price at US$580 per tonne is higher than both Brent crude oil of US$440 per tonne and gas oil price of US$545 per tonne. — Kenanga Research, July 20

This article first appeared in The Edge Financial Daily, on July 21, 2015.